Santos's US suitor could resort to divestments of key gas production assets in the Cooper Basin and Western Australia in order to secure foreign investment clearance for its $13.5 billion takeover bid, according to investors and analysts.
The view reflects market cautiousness about the likelihood of success of Harbour Energy's $13.5 billion cash takeover bid, with Foreign Investment Review Board approval weighing heavily on prospects for a deal.
But a green light from FIRB is not the only risk, with the aggressive debt funding for Harbour's bid and complications involving Santos's Chinese shareholders seen adding further uncertainty.
Shares in Santos remained about 10 per cent shy of Harbour's $6.50 a share proposed offer, which Watermark Funds Management's Tom Richardson said he considered "about right", considering the risks involved. The stock shed 5¢ to $5.84.
"We like the assets in the Cooper Basin ... and so we look forward to keeping those as a strategic part of the portfolio," said Harbour boss Linda Cook. daniel.gray
The issue of potential divestments is a live one even outside the FIRB process given the Adelaide-based oil and gas producer is in the final stages of negotiating the sale of its Asian portfolio.
That business, which includes fields in Indonesia and Vietnam but not the prized Papua New Guinea LNG, has been on the block for some time, with chief executive Kevin Gallagher in February citing "significant interest" from suitors.
The due diligence process now under way by Harbour could suggest a hiccup, but sources close to the US firm suggested it has a similar view to Santos that the Asian portfolio is non-core and, as such, it would not stand in the way of a divestment.
A Santos spokeswoman said on Wednesday the sale process is "well advanced".
"Santos is absolutely focussed on continuing to deliver our strategy and that includes selling non-core assets or running them for value under our low cost model," she said.
However speculation that Harbour could consider the sale of Santos's Cooper Basin interests runs counter to the view put by Harbour boss Linda Cook that the asset is a key part of the portfolio, both for domestic supply and its links with the GLNG export project.
"We like the assets in the Cooper Basin, which are critically important and synergistic with what's going on in Queensland, and so we look forward to keeping those as a strategic part of the portfolio," she said.
Still, Credit Suisse analyst Mark Samter suggested that the Cooper Basin infrastructure at the Moomba gas plant could be sold to smooth FIRB worries about the domestic gas market. Likewise, the WA business, which includes joint ventures with Quadrant Energy – where there is a separate sale process underway for Brookfield's 50 per cent stake.
"Maybe both strategically and politically it could be logical to divest these assets," Mr Samter said. He suggested the WA assets may be joined with Quadrant providing a stronger platform for a potential sale or IPO.
The FIRB approvals process is understood to have kicked off in earnest over the past 24 hours after earlier preliminary talks.
Meanwhile, the South Australian government is keen to learn more about the specifics of Harbour's plans, its commitment to keep Santos's headquarters in Adelaide, intentions for jobs, and on increased spending in the Cooper Basin.
Ms Cook is expected to meet with SA Premier Steven Marshall when she is back in Australia later this month.
Investors are also watching for signs from Santos's Chinese shareholders, Hony Capital and ENN, as to their views on Harbour's proposal, which includes an arrangement for them to roll over their interest in Santos into the unlisted Harbour entity.
But Watermark's Mr Richardson questioned their appetite to take unlisted shares and give up their board seats at Santos, as well as potentially their development rights on future projects. Under a "strategic relationship" struck last June, the Chinese pair are unable to block any takeover bid for Santos, although they can counter any offer. The deal also provides for Santos and the Chinese investors to give each other preference in future investments in gas and LNG in Australia and Papua New Guinea.
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